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Fixed Capital: it’s Meaning, Definition and Importance

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Fixed Capital: it’s Meaning, Definition and Importance!

Fixed Capital:

The expression ‘fixed capital’ often considered to be analogous to ‘fixed assets’ denotes the employment of capital in permanent assets and other non-current assets. The fixed assets are assets of a permanent nature that the business does not intend to dispose of, or that could not be disposed of without interfering with the operation of the business.

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Thus the fixed assets are held by a company with the object of earning revenue directly or indirectly and not for the purpose of sale in the ordinary course of business. The fixed assets include land, buildings, plant, machinery and other fixed equipment, furniture and fixtures, vehicles, livestock etc.

The investment in the fixed assets is the first initial step in establishing a corporation. The investment in non-current assets is also called fixed capital. Such assets include items in which capital is locked up for a long period.

Although they do not indicate the investment in physical productive facilities, yet they are necessary for the conduct of the business and considered essential part of the capital arrangement.

They include long-term receivables, advances to subsidiary or affiliate companies, goodwill, patents, copyrights, long term investment in other companies and pre-paid expenses.

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The important definitions of fixed capital are as follows:

1. “Fixed capital is invested in the fixed or long-run assets. The amount of fixed capital need, therefore, varies directly with the amount of fixed assets owned or used by a business.”

—Wheeler

2. “Fixed capital is comparatively easily defined to include land, buildings, machinery and other assets having a relatively permanent existence.”

—Hoagland

3. “Fixed capital is the funds required for the acquisition of those assets that are to be used over for a long period- such assets as land, buildings, machinery, equipment and tools.”

From the analysis of the above definitions, it is clear that fixed capital consists of investment in permanent assets which are necessary for conducting the operations and expansion of a business unit. Thus, fixed capital is used for meeting the permanent requirements of a business enterprise. It is the capital which is invested in fixed assets and non-current assets to generate profits for a company.

Importance of Fixed Capital:

Fixed capital plays a vital role in the establishment of business enterprises. It is required for acquiring fixed (tangible and intangible) assets, which is the preliminary requirement for starting a company. There are certain enterprises (manufacturing and public utilities) which cannot think of running in the absence of adequate amount of fixed capital.

Right from the very beginning, when the idea to set up an industrial unit generates in the mind of the entrepreneur, the initial investment is made in fixed assets, only then, enterprise will be in a position to work smoothly.

Fixed capital is not only required for financing the acquisition of fixed assets, but also for initial period of its working in order to establish itself. It is also needed for making improvements and expanding the existing set up of a business enterprise. Thus, it appears that adequate amount of fixed capital is an essential pre-requisite for the success of an industrial concern.